The Market Call | January 2019

Macroeconomy

We expect GDP growth to go faster at 6.8% to 7.2% in 2019 compared to 6.2% in 2018. Domestic demand which rose by 8.5% in 2018 should boost growth in 2019. Investments, via elevated infrastructure spending and strong capital goods imports, will continue to lead growth. Consumer demand should recover especially in 2019, as we expect inflation to decelerate to 3% to 3.5% in 2019 from 5.2% in 2018, more jobs from the above, and election-related spending in H1.

Fixed-Income Market

US Fed’s “pause” in its policy rate hikes cycle in 2019 and empirical evidence showing that natural real interest rates have gone below 1% for good, plus the global economic slowdown, imply that foreign interest rates won’t matter much in 2019. These, together with our view that domestic inflation will decelerate sharply and go below 4% (y-o-y) by Q1, make us more optimistic for bond investments, even though short-term money remains tight.

Equities Market

Prospects of solid US macroeconomic fundamentals, at least one (or none at all) Fed rate hike, sharp fall of domestic inflation (below 3% by Q3-2019), lower bond yields, and faster PH economic growth, together with expectations of EPS growing by 10% and market PE returning to 5-year average, should propel PSEi to reach 8,400 to 8,800 in 2019.